Let 'Em Eat Dolmathes

Let Them Eat Dolmathes! The US markets are being held hostage by a country the size of a postage stamp. Greece accounts for a bit less than 3% of the Eurozone GDP output. The Greek economy is the 32nd largest in the world. Why are we hanging on every rumor? Why do the lights go hot and the cameras fire up every time a Greek student flings a stone at the Greek Parliament building? It started out as contagion fear. It seems so long ago, but remember the PIGS. Portugal, Ireland, Greece and Spain. Portugal received its bailout and is in the process of righting the balance of debt to GDP. Ireland took their EURO-TARP like bailout and backstopped the banks and staunched the bleeding immediately followed up with severe austerity measures. The Celtic tiger is beginning to roar again. Greece, well there is simply an unwillingness of the citizenry to work and pay taxes. Pure and simple. Politicians over the years continued to stuff the public payrolls with unnecessary hires in order secure their cushy seats. The details I read look so very similar to the auto union contracts. Teachers were hired without any classrooms to tend to. Once hired, they were near impossible to fire. People didn't get fired anyway, they were put into a jobs bank. Meaning they sat in a room, collected a check with full benefits and played Sudoku. We saw how well that worked out for our Auto industry. In Greece paying taxes is merely a suggestion. One example, Greece has a pool tax. Meaning if your home has a pool, you must pay a pool tax. Pretty simple. The clever home owners instead called in the interior decorators and had them attach an AstroTurf like cover over the pool so the helicopters flying overhead to count pools would miss them. BRILLIANT! The situation is so poor Greece finally had to attach individual tax bills to monthly electricity bills. They felt this was the only way to begin collecting taxes. The situation is simply unsustainable from both sides. I believe it has come to the point of let them eat their own cooking. The politicians don't want to anger their constituents any further lest they lose their treasured seat. The citizenry believe outsiders are ruining their way of life and don't wish to pay their bills. I believe it is time to let them go. After allowing the global economy to be walked to the edge of the abyss far too many times over the last three years, the EU has finally gotten serious about this financial mess. The formation of the ESFS with over $1 trillion euros ($1.35 trillion US) in firepower was huge. Now that the EU has gotten serious the IMF can be more aggressive in their interventions. Here is a game plan as I see it:

1. Totally wipe out the Greek debt. Forget taking 50% haircuts. Taxes aren't being collected, spending cuts aren't being enacted, entitlement programs aren't being scaled down. Write off the debt completely
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2. Kick their non-Laissez Faire cans out of the Eurozone. This Greek tragedy has tortured us long enough. Until the Greek citizenry realize it isn't outside forces destroying the country, it is unsustainable social programs and cronyism that is the cancer, no one can help them. Much like an addict that needs to hit rock bottom before he can scrape himself off, pick himself up and begin rebuilding.

3. Initiate operation Euro-Tarp. Direct injections of capital into banks. Back stop financial institutions, guarantee money market funds and flood the system with cash.

Time to rip off the band-aid with one quick yank instead of the slow painful process we're experiencing currently. Either way it takes the same amount of hair off your shin, but the shriek is a heck of a lot shorter.

There is something really positive going on right under our noses and apparently hiding in broad daylight. The US economy is regaining its footing. Third quarter GDP popped up to 2.5%, good not great. Unemployment claims, released this morning dipped below 400,000. The monthly private employment survey released by ADP showed a surprising 110,000 gain for October. Retail sales remain elevated. Finally corporate earnings have not cratered, as some perma-bears have been prognosticating. Companies that have released earnings thus far have beaten 75% of the time. We are on target for $95-$100 earnings per share for S&P 500 companies for 2011. Next years 2012 earnings estimates come in close to $110 per share. If these numbers hold, it becomes the multiple on those earnings we will afford. It would be reasonable to use a 13-15 multiple historically which brings us our target range of 1430-1650. This with a dysfunctional Euro zone. This with the collapse of another Investment bank with $41 billion in assets. Think of the firepower US corporations would have if one of our major trading partners stabilized along with the soon to be announced US austerity measure by the Gang of 12 on or before November 23.

In closing today we continue to be held hostage by Greece and until that gets resolved, we remain cautious and skeptical we can have a meaningful breakout without some resolution. Either way this meal leaves a sour taste in your mouth and one begging for a change in menu.

I'll continue monitoring the data and be in touch should we need to shift out strategy going forward.

Yours in pursuit of the Kwan!